Saturday, May 25, 2013

Of Founders and Rocketships

Of Founders and Rocket Ships

I finished reading Basil Peters Angel Investing classic "Early Exits" today. And thanks to a timely post of it by Carrie Mantha Founder/CEO of Indira Collection I then back to back read a great piece titled "Start Up Drugs" by Andy Dunn Founder/CEO of Bonobos.

I came away with two contradictory Head vs Heart takeways: The Head tells you that Basil is right and that the investing mechanics for early exits are compelling. And for Founders the logic seems pretty attractive too especially since, as Board member, I see the logic of transitioning to a scaling CEO in many cases. Yet the Heart tells you that as an investor you want to back a Rocketship, and that Rocketships are more likely to be piloted by a Founder/CEO who stays for a much longer part of the ride than is "normal". 

Early Exits
Basil's thesis is that start ups that plan for and execute exits at the +/-$30mn level produce better outcomes for all stakeholders ... well, except VCs who he argues shouldn't have a stake in the first place. The point being that each step a company takes up the letter grades of institutional funding rounds, the higher the exit valuation that the VC money will need to achieve its desired X return. And that since VC funds have a formal life of 10 years, often extended, it is in their interests to play out the clock in the hope of building to that target value.

His argument is that this in turn creates a conflict of interest with early investors including Angels, and indeed Founders, for whom a "low value" exit at say $30mn might provide a very attractive X to them. This can manifest itself when VCs, who come to dominate the Board, argue against and block an early sale at a level that would be awesome for Angels/Founders but of no use in the context of their own fund performance goals.

When it comes to Founders specifically, Basil argues that taking VC funding can often lead to what are likely very unintended adverse consequences: a) they lose their jobs (often for good reason as the Board decides to replace the Founder/CEO with a hired gun CEO experienced in scaling. But that's still painful!); b) their personal liquidity (and thus ability to start a new venture, or head off to the beach) is impaired because of the multi year push back of exit timing and c) in the worst case scenario they lose their job, the liquidity event is deferred but the company "rides over the top" and the exit value achieved actually heads south as the business faces new competition or other adverse developments that were not apparent at the time that a "low" value early exit might have achieved.

Start Up Drugs
Andy's great piece is a heartfelt tale about Founder struggles, inc the drug of paid advertising, how funding makes for more stress not less etc ... but it intersects with Basil's work in several respects.

As Andy notes, Prof Noam Wasserman of HBS's article on "The Founder's Dilemma" characterizes the opportunities and risks inherent in taking outside funding in the question: "Do you want to be rich or king?" Prof Wasserman's research concluded that, four years after founding, only 40% of Founder/CEOs are "still in the corner office." So very much validating the observations made by Basil Peters on Founder/CEO longevity.

But Andy highlights the paradox of this Founder/CEO job insecurity when stacked against many of the most successful high growth businesses, as documented by Andressen Horowitz. Specifically that: 
"... the biggest companies are created by founders who can grow into becoming CEOs."

He goes on to note that startups that become big companies are the "survivor bias" of rocket ships:
"Rocketships are start-ups which grow so fast that the founder has the luxury of learning on the job because they’re viewed as geniuses, or are indispensable in the early innings. That genius attracts a lot of capital, and capital and indispensability and strong growth gives a founder time to evolve from founder to CEO, and to over time hire a leadership team that can cover for their weaknesses. As time heals all wounds in life, growth solves all problems in start-ups."

Thursday, May 9, 2013

Venture Capital's Gender Diversity Challenge

Latest Midas List and the continued extreme gender imbalance in Venture Capital Land

Really, 3%?

Highlighting the continued gender diversity challenge of the Venture Capital Industry the number of women VCs listed in the latest Forbes Midas List fell to just three of one hundred ranked. So congrats to Jenny Hongwei Lee (GGV - #36), Mary Meeker (Kleiner Perkins - #47) and Theresia Gouw (Accel #82).

Financial services broadly is well know as been a tough environment for women. But I am pleased to say that when it comes to Angel Investing the numbers seem to be improving. A number of groups and initiatives (Astia, Golden Seeds, Pipeline Fellowship, 37 Angels to name a few I am involved with) are working to bring more women into the Angel Investing world and both directly and indirectly work to support women entrepreneurs too.

The Center for Venture Research recently reported a rise in the proportion of women Angels in 2012 to 22%. So a clear improvement after the proprotion had been stuck in the 10-15% range since the middle of the last decade. But the Midas List (more broadly women make up just 11% of investment professionals at Venture Capital firms) shows that Venture Capital Land is, sadly and more than ever, in a league of its own.